5 Deathbed Stocks

We've all heard of the "death rattle," the last gasp from a lost soul's lungs. Sometimes, we seem to hear it from the companies in which we invest. Revenues dry up. Margins contract. Profits evaporate. All these signs suggest that their condition is worsening -- a financial death rattle, if you will.

Stocks in sick bay
Don't assume that all such companies are goners. Some will barely cling to life, while others make a full recovery. Here, though, we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 110,000-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,500 stocks. The first year of collecting data suggests that CAPS' highest-rated stocks performed best, while its lowest-rated companies fared worst. We've unearthed a handful of stocks that look like they might be headed six feet under, having recently dropped from two stars to the lowest one-star rating.

First we'll check out some quick tests for liquidity -- the current ratio and the quick ratio (also called the "acid-test" ratio) -- which give us an idea of a company's ability to pay its bills. A current ratio above 1.5 and a quick ratio north of 1.0 means it's able to meet its short-term operating needs. We've also added the Altman Z-Score to predict the likelihood of bankruptcy, but please note -- it's not designed to be used in every situation, and there are some limitations to it.

A company scoring 3.00 and above is considered safe, scores between 2.70 and 2.99 are in the "yellow flag" zone, scores between 1.80 and 2.70 mean the chance of going bankrupt within two years is good, and scores below 1.80 mean "Watch out below!"

Here's today's list. The question is, are these companies only mostly dead, or have they already given up the ghost?

Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's.

We obviously don't know whether these companies are headed six feet under, so don't short them based on their appearance here. Even so, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the immediate future.

Bad case of road rash
Perhaps the surprising June sales report from General Motors (NYSE:GM) will help boost auto parts supplier Lear as well, but the crippling strike at American Axle & Manufacturing earlier this year forced the idling of 29 GM plants, which rippled out and caused Lear to lay off some 1,000 workers.

The health of the automotive market is what’s turning top investors, like CAPS All-Star falcon2382, sour on the parts supplier:

Generally speaking I think Leer is a good company, but that said, they have everything working against them.

1st... the market is about to reverse again and reestablish the larger bear-market trend.

2nd... (albeit connected to the first) gap opens higher in a bear market generally close fairly quickly. --there's a Japanese adage that goes something like: "a window opens when things look good outside, but when the clouds come back the window inevitably must close again."

He enumerates further concerns for Lear's position here.

Not a good thing
Over the past few years, the tanking of Martha Stewart Living has been foretold several times -- all prematurely. At the moment, though, maybe the doom and gloom is on target. The company’s CEO stepped down, it faces a difficult advertising climate, and a lucrative contract with Sears Holdings (NYSE:SHLD) -- which helped foster its return to profitability last year -- will be ending. That has investors like johnwick concerned that what looked like a turnaround in the making is instead the herald of a new decline:

For every year between 2003 and 2007, Kmart didn't sell enough Martha Stewart Everyday products to meet the minimum royalty promised to [Martha Stewart Living]. And so those payments are about to plummet: Unless Kmart has the turnaround year of the century and Martha's products fly off the shelf, it won't be required to pay MSLO more than $20 million in 2009. That's $45 million less than this year, a drop that will all but eviscerate profits in the company's merchandising division.

Rattling the cage
Are these companies doomed to drag their investors into an underworld of underperformance? Or will they recover to shine again? On Motley Fool CAPS, you have the power to tell your fellow investors just how you feel. Sign up today, absolutely free, and let us know whether you think the Grim Reaper's at the door.